Section 424 Interest for defaults in payment of advance tax.

Income-tax Act, 2025

At a Glance

Clause 424 of the Income Tax Bill, 2025 (Old Version) sets out the liability to pay simple interest where an assessee defaults in payment of advance tax or pays advance tax that is less than 90% of the assessed tax. It prescribes the rate (1% per month or part thereof), the computation period, and adjustments on reassessment, recomputation, rectification orders and payments made before final determination. The provision affects taxpayers required to pay advance tax and tax administration for assessment and demand processes. Effective date or enactment date: Not stated in the document.

Background & Scope

Statutory hooks: Clause 424 interacts with sections 404, 406, 407 (advance tax provisions), section 270(1) (determination of total income), section 279 (reassessment/recomputation), sections 287, 288, 359, 363, 365(10), 368, 377, 378 (orders affecting assessments), section 266 (payment of tax), section 267 (additional income-tax), sections 157, 159, 160 (reliefs/deductions), and section 206 (tax credits). The Clause defines the scope of interest chargeable for defaults in payment of advance tax and specifies the basis of computation (assessed tax) and adjustments upon subsequent orders and payments. The text provides a working definition of "assessed tax" in subsection (2) with specified reductions. Any definitions beyond these cross-references: Not stated in the document.

Statutory Provision Mode

Text & Scope

The Clause applies where, in any tax year, an assessee liable to pay advance tax u/s 404 either (a) has failed to pay advance tax or (b) has paid advance tax u/ss 406 or 407 which is less than 90% of the assessed tax. In such cases the assessee is liable to simple interest at 1% per month or part of a month for the period beginning from 1st April following that tax year up to either (i) the date of determination of total income u/s 270(1) or (ii) the date of completion of regular assessment. The quantum on which interest is charged is (i) the assessed tax where there was total failure to pay, and (ii) the shortfall where advance tax paid is less than 90% of assessed tax.

Interpretation

The Clause prescribes a penal/compensatory charge for underpayment or non-payment of advance tax. The use of a fixed percentage (90%) as a threshold creates a safe harbour for taxpayers whose advance payments meet that proportion of the eventual assessed tax. The period of liability begins from 1 April following the tax year - indicating a uniform start-date for the interest calculation irrespective of when during the year the shortfall occurred. The statutory construction suggests interest is calculated on assessed tax subject to reductions expressly listed in subsection (2). Legislative intent: Not stated in the document beyond the text; interpretive principles indicated by the text are limited to the explicit thresholds and reduction items.

Exceptions/Provisos

The Clause contains no express discretionary exceptions beyond the listed reductions in computing "assessed tax". There is an implicit exception where advance tax paid is at least 90% of assessed tax - in which case subsection (1)(b) does not trigger interest. Provisos about inclusion or exclusion of additional income-tax u/s 267 are given in subsection (3). Any further exceptions or administrative relaxations: Not stated in the document.

Illustrations

• Example 1: A taxpayer liable to pay advance tax pays nothing during the year. After completion of assessment u/s 270(1), assessed tax (after permitted reductions) is Rs. 100,000. Interest at 1% per month or part-month is payable on Rs. 100,000 for the period from 1 April following the tax year up to the date of determination u/s 270(1). (Numbers used only to illustrate method; exact period and months determine final interest.)
• Example 2: A taxpayer pays advance tax of Rs. 80,000 while assessed tax (after reductions) is Rs. 100,000. Because advance tax paid is 80% (<90%) of assessed tax, interest is payable on the shortfall of Rs. 20,000 at 1% per month or part-month from 1 April following the tax year until the assessment determination date.
• Example 3: Where reassessment u/s 279 increases the amount on which interest was payable, the increased amount A is computed as A = B - C, where B is tax on total income after reassessment and C is tax on total income determined initially. Interest is then charged on A at 1% per month from 1 April following the tax year to the date of reassessment/recomputation.

Interplay

The Clause expressly interacts with: (i) advance tax provisions (ss. 404, 406, 407) by creating interest liability for defaults; (ii) section 270(1) determinations and regular assessments (including first-time assessments under s.279); (iii) sections allowing reliefs/deductions/foreign tax credits (ss.157, 159, 160) and tax deducted/collected at source (Chapter XIX-B) which reduce the "assessed tax" base for interest; (iv) payment u/s 266 and other payments, which reduce interest liability per subsection (4); and (v) reassessment/recomputation and rectification orders (ss.279, 287, 288, 359, 363, 365(10), 368, 377, 378) which increase or reduce the interest and trigger demand or refund. No reference to rules or circulars outside these sections: Not stated in the document. Potential interpretive tensions include the precise operation when both section 270(1) determination and a regular assessment are made, and the drafting distinction between conjunctive vs disjunctive endpoints (see earlier differences).

Differences between Section 424 of the Income-tax Act, 2025 and Clause 424 of the Income Tax Bill, 2025 (Old Version)

• Subsection (1)(i)/(ii) wording: The Act (Document 1) separates the two alternative endpoints with a semicolon and uses "and" connecting clauses for the period: "(i) upto the date of determination of total income u/s 270(1); and (ii) upto the date of completion of regular assessment, where a regular assessment is made,". The Bill (Document 2) uses "or" between (i) and (ii).
  • Practical impact: minor drafting difference that could affect whether the period is conjunctive or disjunctive in interpretation. The Act's wording suggests distinct applications depending on whether a regular assessment is made; the Bill explicitly presents them as alternatives.
• Definition of "assessed tax" - subsection (2)(f): The Act (Document 1) lists tax credits allowed to be set off as per sections "206(1)(m) to (p) and 206(2)(e) to (h)". The Bill (Document 2) refers to "section 206(13)".
  • Practical impact: substantive - the Act narrows or specifies particular subclauses of section 206 (by cross-referencing multiple sub-paragraphs) whereas the Bill references a different provision (206(13)). This changes which tax credits are excluded from the amount on which interest is computed; consequently, taxpayers' assessed tax base for interest could increase or decrease depending on which credits are included or excluded.
• Subsection (5) drafting: The Act (Document 1) frames the antecedent as "Where, as a result of an order of reassessment or recomputation u/s 279, the amount on which interest was payable ... is increased, the assessee shall be liable to pay..." whereas the Bill (Document 2) begins "Where, the amount on which interest was payable ... is increased, as a result of an order of reassessment or recomputation u/s 279, the assessee shall be liable..."
  • Practical impact: purely drafting/sequence variation without a clear substantive change.
• Subsection (6)(a) form phrasing: The Act (Document 1) states "in such form as may be prescribed specifying the sum payable" while the Bill (Document 2) states "in the form as prescribed specifying the sum payable".
  • Practical impact: negligible - both indicate prescribed form; the Bill's phrasing could be read as referring to a specific existing prescribed form, the Act's phrasing permits future prescription.
• Other differences: No other substantive additions, removals or new provisos are present between the two documents. Several differences are stylistic or drafting only.
  • Practical impact: most changes appear drafting/clarificatory except the cross-reference change in subsection (2)(f), which is substantively significant for which tax credits reduce "assessed tax".

Practical Implications

• Compliance and risk areas: Taxpayers required to estimate and pay advance tax should ensure aggregate advance payments are at least 90% of expected assessed tax to avoid interest exposure at 1% per month. The specific list in subsection (2) of amounts that reduce "assessed tax" is central to calculating the 90% threshold; differences in which tax credits are recognised (see cross-reference differences between Bill and Act) materially affect exposure.
• Record-keeping/evidence points: Taxpayers should retain documentary proof of tax deducted/collected at source, claims u/ss 157, 159, 160, and evidence of foreign tax paid and credits (for subsections (2)(a)-(e)). Records of payments u/s 266 and any notifications/orders under the listed assessment sections are also necessary to calculate and support reductions, refunds or increased demands described in the Clause. The document does not prescribe specific forms or timeframes for claims-Not stated in the document.

Key Takeaways

• The Clause imposes simple interest at 1% per month or part-month for underpayment/non-payment of advance tax, from 1 April following the tax year to assessment determination or completion of regular assessment.
• A 90% safe harbour is provided: interest triggers where advance tax paid is less than 90% of assessed tax.
• "Assessed tax" is expressly reduced by specified items (TDS/TCS under Chapter XIX-B, reliefs under ss.157, 159, deductions under s.160, and certain tax credits), which directly affects interest computation.
• Reassessment/recomputation that increases the taxable amount attracts additional interest computed by formula A = B - C for the period from 1 April to the date of reassessment; reductions or increases pursuant to other specified orders lead to refunds or demands respectively.
• Payments made before determination affect interest: interest is calculated up to payment date, reduced by interest already paid under s.266, and thereafter calculated on any remaining shortfall.
• Practical compliance focuses on proper advance tax estimation, timely payments, and meticulous maintenance of records supporting reductions and credits.
• Several drafting variances between Bill and Act are minor, but the cross-reference to tax credits (subsection (2)(f)) is a substantive change with potential material effect on interest exposure.

Full Text:

Section 424 Interest for defaults in payment of advance tax.